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275 Washington St. Corp. v. Hudson River Int'l., LLC: Collecting Indemnification Damages in Commercial Leases

In a recent case, 275 Washington St. Corp. v. Hudson River Int'l., LLC, 465 Mass. 16 (2013), the Supreme Judicial Court ruled that a commercial landlord cannot recover post-termination damages under an indemnification clause until the original lease term expires.  In 275 Washington St. Corp., the tenant vacated the premises and ceased paying rent 18 months into a 12-year lease.  The lease included an indemnification clause that provided, "Tenant shall indemnify Landlord against all loss of rent and other payments which Landlord may incur by reason of such termination during the remainder of the term."  After the tenant vacated, the landlord terminated the lease, and, relying on the indemnification clause, demanded that the tenant pay the landlord's lost rent over the entire 12-year lease term, in addition to the unpaid rent that accrued prior to termination of the lease.  The landlord's total potential damages with interest exceeded $1,000,000.

At issue in the case was whether the landlord could collect the future lost rent now, or would have to wait until the original 12-year term expired in 2018.  The tenant pointed to a 1931 Massachusetts case, Zevitas v. Adams, 276 Mass. 307, 317 (1931), which stated, "Recovery under an indemnity clause of a lease cannot be had until the specified term of the lease has ended."  The landlord argued that if it were required to wait until 2018 to collect its damages, it was highly likely that the defaulting tenant corporation would be dissolved or declared bankrupt by then, and thus the landlord would have no recourse.

The Supreme Judicial Court ruled that the landlord must wait.  The SJC reasoned that the landlord could not know the amount of its future lost rent to a reasonable degree of certainty because it could not predict what would happen between now and 2018, when the lease term (and thus the indemnification period) ended.  For example, the landlord may sell the premises between now and then, or a fire may destroy it.  Additionally, the SJC noted that, the landlord "has fair notice under our common law that the indemnified amount shall become due at the end of the original lease period," and that landlords who want to be able to collect indemnification damages at the time of breach, rather than after the lease expires, should include explicit language to that effect in their leases. As the SJC put it, "landlords need not enter into any lease that fails to provide them with the remedies they desire for posttermination loss." 

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